Prepayment Plan Sleeps With the Fishes

Saying it only received $369.9 million in pledges, the NCUA announced last week that it will not go forward with the program allowing credit unions to prepay some of their assessments on the cost of rescuing corporate credit unions.

The NCUA said it had received pledges from 799 credit unions. It declined to state which credit unions made pledges and how much each had pledged. Under the program’s rules, the agency had to have received $500 million in pledges.

As a result of the program not having sufficient support, credit unions will have to pay a higher assessment this year to pay off part of the loan that the NCUA received from the Treasury Department to rescue the corporates.

The NCUA has advised credit unions to set aside between 20 and 25 basis points for this year’s assessment. Had the prepayment program launched, the assessment would have dropped 6.4 basis points to 18.6 basis points, according to the agency.

The NCUA board is scheduled to vote on the amount of the assessment at a special meeting on Aug. 29. NCUA Deputy Executive Director Melinda Love has said there probably won’t be a need to have a special assessment to shore up the NCUSIF.

NAFCU President/CEO Fred Becker said he wasn’t surprised by the lack of interest in the prepayment program given the financial difficulties facing many credit unions.

“Especially after the corporate credit unions’ problems, the cooperative spirit among credit unions isn’t the same as it was 12 years ago. Credit union CEOs are focusing more on their fiduciary responsibilities to their institutions and aren’t thinking as much about the industry as a whole,” he said.

CUNA Senior Vice President and Chief Economist Bill Hampel said based on his conversations with credit union leaders, he wasn’t sure whether there was enough support to launch the program. He diagnosed one of the reasons for the insufficient interest as the savings to credit unions wouldn’t have been that great.

“An 18.4 basis point assessment is a lot closer to 25 than to 10, which the assessment would have been if they had gone for a $1 billion program, which is what we recommended. A lot of credit unions probably thought that it was a lot of effort to participate in the program as designed, for a relatively small savings,” he said.

Former NCUA Board Member Geoff Bacino said the program was “noble concept” but “an interest-free loan is a tough sell.”

Hampel also said some of the larger credit unions, who would have had to contribute the bulk of the funds to the program, have had better financial results.

He said based on CUNA’s preliminary reviews of results from some of those credit unions, the average return on average assets is about 90%. In addition, the anger of many credit unions at the NCUA made some of them less likely to want to participate.

NCUA spokesman David Small said the agency structured the program as it did in response to industry comments. He said the $500 million figure was picked to satisfy the requests made in the comment letters that all funds be used for dollar-for-dollar reductions this year.

The NCUA has until 2020 to repay the remaining amount of its loan from the Treasury Department, but the agency could reduce the amount of time that it takes to repay the money. The agency has estimated that the final amount will be between $7 billion and $9 billion.

State Employees' Credit Union of North Carolina President/CEO Jim Blaine said he’s concerned that the assessments levied on credit unions will cause an increase in conversions and switches to private insurance. As a result, this will increase costs to credit unions such as his, which remain federally insured.

He said that he and other credit union leaders want the agency to be able to force any federally insured credit union that leaves the insurance fund to pay the full amount of its assessments.

“All the credit unions were part of the corporate credit union system when the problems occurred. so they should have to pay their entire fair share, it’s like eating a good meal and then deciding you don’t have to pay for it,” he said.

Blaine said he and other credit union leaders want to work with CUNA, NAFCU and NASCUS to see what options are available and see if they can persuade Congress to give the NCUA additional powers.

NCUA spokesman Small wrote in an email that based on current law, the agency “cannot legally assess those credit unions that leave the system the full amount.”